Dynamic pricing with reference price effect and price-matching policy in the presence of strategic consumers

In this paper, we consider a retailer that sells a product with high storage cost over a two-period horizon. The goal is to investigate the single and combined effects of reference price and price-matching (PM) on the purchasing behavior of consumers and determine how these affect the retailer?s optimal pricing decisions and optimal total discounted revenue. We first present a discrete-time dynamic pricing (DP) model over a two-period horizon with a reference price effect in the presence of strategic consumers. Then we subsequently extended to another DP model in which the retailer implements a PM policy. The results show that under the reference price effect, the retailer?s revenue will always decrease, even when a PM policy is implemented. The PM policy is not always beneficial for the retailer, especially when the discount factor is infinitely close to 1. Second, we propose a model misspecification approach to investigate the effect of the reference price. Furthermore, the value of a PM policy is discussed. We find that the value of a PM policy is generally best when the discount factor is at a threshold value and also that the value of PM is much greater in the presence of strategic purchasing behavior.